Chavez Company Is Considering Purchasing New Equipment or Overhauling Its

Chavez Company is considering purchasing new equipment or overhauling its existing equipment.The manager has gathered the following information: $\begin{array}{|l|lr|}\hline \text { Current machinery. }\\\hline \text { Original cost } & \$ & 50,000 \\\hline \text { Acccumulate d depreciation } & & 40,000 \\\hline \text { Anmul operating costs } & & 5,000 \\\hline \text { Current market value } & & 1,500 \\\hline \text { Salvage value at the end of five ye ars } & & - \\\text { Cost of ove thauling machinery. } & & \\\hline \text { Cost of overhaul } & \$ & 12,000 \\\hline \text { Arrual operating costs after overhauling } & & 2,000 \\\hline \text { Salvage value at the end of five ye ars } & & - \\\hline \text { New machinery. } & & \\\hline \text { Cost } & \$ & 56,000 \\\hline \text { Anrmal operating costs } & & 1,000\\\hline \text { Salvage value at the end of five ye ars }&&-\\\hline\end{array}$ Required:
1)Identify the sunk costs associated with this decision.
2)Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment.
3)Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery.
4)What is your recommendation for this decision?

Correct Answer:

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1)Sunk costs include the original cost a...

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